Talking to Kids about Money

[2527]

I'm not sure what to tell my kids, 14, and 11, about money.

Our circumstances are unique.  We live in an affluent area, where our all in income of about $170,000 (my job, my military pension, my wife's job, some investment income I take to spend)  is average or below average for the area.  We live in a townhouse, drive older cars, have many of the things and do many of things as our neighbors, but a notch or two down.  Most of our neighbors are vice presidents and senior vice presidents, but I am a bread and butter government employee and my wife is a part time office manager.

On the other hand, we have about $2.5M invested in the stock market.  The kids know I am interested in investments, and I've told them to not worry too much about college expenses, but they really have no idea of  the investment amount.  I would like to be more open with them so they know and start to understand money more.  But it sounds like a very big number to a teenager, and I think it may complicate things and distort their thinking.  I would like to show them investment reports, websites, etc, but they have dollar amounts. 

Any first hand experience or thoughts on talking to kids about money, especially in unusual circumstances like what I describe?

[Malaysia41]

This one is so difficult for me.  Each kid responds in his own way to the exact same lessons - can be frustrating. 

Right now, the main thing we're doing is demonstrating frugality, talking about 'little green soldiers' (which my son has renamed to the more apt 'little green slaves') and involving him in the budget.  Now, he gets on our case when we leave the air conditioner on in the bedroom!  (I love it!)

That said, my step daughters are older and I fear we didn't talk to them enough about $.  I've given them each the YMOYL book but I don't think either has read it.  They're at an age where a book from their step mom is about the least interesting thing on earth.

So, some thoughts / advice from my own experience:

1. more honest sharing is better than less.
2. try to teach that money really is just a tool
3. money == freedom (FI)
4. the tool is most effective & powerful when you cultivate it through
 a) frugal living (or value based spending)
 b) investing little green soldiers in various activities
 c) developing your own skills so as to attract more $
 c) on and on - really there are so many micro lesson to teach - so back to #1 - talk about $ often!

But like I said - this one is so HARD.  Kids can latch onto any number of details and not hear the rest.  For example, if you told your kids you have $2.5M invested, that might be the only thing they hear and then their take-away could be "I don't have to worry about money / I can spend whatever I wish / dad'll pick up the bill" .  In fact, at that point, when you say you won't be picking up their bills for the rest of their lives, they may hear "I'm a cheap bastard who cares more about $2.5M than my kid".

I'm not saying this will happen.  This is just an example of how your kids could interpret what you say - if money is only a point conversation here and there. 

My main advice is this: talk to them often - include them in household financial matters, share out loud what you are considering doing, get their inputs, etc.  The more frequently you have honest financial conversations - about stuff going on that moment - the more likely they'll hear the messages you wish to convey. 

[the_gastropod]

There's actually a pretty good NYTimes article about this that was published today: http://www.nytimes.com/2015/02/01/your-money/why-you-should-tell-your-kids-how-much-you-make.html

[GizmoTX]

My main advice is this: talk to them often - include them in household financial matters, share out loud what you are considering doing, get their inputs, etc.  The more frequently you have honest financial conversations - about stuff going on that moment - the more likely they'll hear the messages you wish to convey.

+1

When DS was born, we had been married for 25 years with very successful careers & were already FI. Hiding it was not an option, as DH was CEO of his company, but we were determined to raise a considerate, money savvy, unspoiled kid. We went long on family experiences, short on gifts, just on his birthday & Christmas, limited to one or two meaningful things within reason. No impromptu handouts -- he had to spend a modest allowance, even though his friends were getting all sorts of things. We talked a lot about that. On trips to the grocery & other stores, we always explained why we were making purchases & how to make value decisions.

Then you start loosening the reins while still demanding accountability. First it's teaching saving & wise spending. We did allowance for chores, with opportunities for earning more. Then tracking income & spending over time, first manually, then a spreadsheet or Quicken. DS has done his own laundry from age 13 on. He decided to do the Boy Scout Entrepreneurship merit badge, requiring that a scout start & run a business for 6 months; he decided to raise & sell tomatoes. He bought all his supplies, did all the planting & weeding, harvested & sold most of his crop to a local high end restaurant for a $400 profit -- untold lessons here. When he entered high school, it was time for a checking account with debit card -- we then loaded it monthly with an amount designed to just cover his school & basic expenses. If it ran out, his problem. At 17, when he started driving solo, we helped him get a credit card, with the requirement that he had to pay it off in full every month.

It's a process, not just a dialogue. We haven't told him details of our net worth, just focused on wise saving & spending decisions. I used to be worried about our net worth killing his incentive, but I think he's now beyond that. We have always lovingly made it clear that while we may be rich, he is not. At 21, it's now up to him to decide what to do, but we hopefully have provided knowledge & we're always happy to coach.

[SaintM]

If you don't teach them, they will get their financial education from their high-spending friends, self-serving investment advisors, snake oil salesmen, fashion magazines, "experts" on CNBC, taxi cab drivers, greedy (and stupid) government officials ... in short from a society that values separating people from their money.

[Malaysia41]

If you don't teach them, they will get their financial education from their high-spending friends, self-serving investment advisors, snake oil salesmen, fashion magazines, "experts" on CNBC, taxi cab drivers, greedy (and stupid) government officials ... in short from a society that values separating people from their money.

YES.  Jeez - I just found out my 44 y.o. brother just bought whole life insurance. Was talked into it by their financial advisor. 

face-palm.

Our parents didn't teach us much about $.  I just happened to get inspired by compound interest math at an early age and that sparked a life-long quest for financial knowledge and skills.  My siblings?  not so much.

Yeah - don't leave it to the financial industry to teach your kids about money - (but I think OP knows that already - just wants to know how to get on with the lessons)

[SaintM]

Depending on the policy, I think whole life has a place in a prudent person's portfolio. The key is to find the lowest fees and shortest payoff period. The fees on my policy are about 1.5x that of term and the payoff period is 5 years. In return for that extra .5, I get perpetual coverage, tax-free 7.5% growth, tax-free withdrawals up to what I put in, and tax-free withdrawals of any amount for long-term care.

[Malaysia41]

Depending on the policy, I think whole life has a place in a prudent person's portfolio. The key is to find the lowest fees and shortest payoff period. The fees on my policy are about 1.5x that of term and the payoff period is 5 years. In return for that extra .5, I get perpetual coverage, tax-free 7.5% growth, tax-free withdrawals up to what I put in, and tax-free withdrawals of any amount for long-term care.

Yes - I'm interested to see the terms.  Perhaps it is a good investment - but I'm not holding out hope.  My take-away while studying for a CFP was that whole life is generally bad. 

[2527]

Interesting thoughts.  In our case, the investments really are hidden unless you have a very keen eye.  I liked your story about the tomato business.  My daughter bakes and sells cookies sometimes and my son shoveled snow for money recently, and I will be happy for them to have as many entrepenuerial experiences as possible.  Given what we are surrounded by, I suppose one thing I would like is for them to know what my wife and I have accomplished.  It boosted my pride in my father, and our family in general, and my interest in investing, when I knew their house was paid off, and he had created a nice set of investments.

My main advice is this: talk to them often - include them in household financial matters, share out loud what you are considering doing, get their inputs, etc.  The more frequently you have honest financial conversations - about stuff going on that moment - the more likely they'll hear the messages you wish to convey.

+1

When DS was born, we had been married for 25 years with very successful careers & were already FI. Hiding it was not an option, as DH was CEO of his company, but we were determined to raise a considerate, money savvy, unspoiled kid. We went long on family experiences, short on gifts, just on his birthday & Christmas, limited to one or two meaningful things within reason. No impromptu handouts -- he had to spend a modest allowance, even though his friends were getting all sorts of things. We talked a lot about that. On trips to the grocery & other stores, we always explained why we were making purchases & how to make value decisions.

Then you start loosening the reins while still demanding accountability. First it's teaching saving & wise spending. We did allowance for chores, with opportunities for earning more. Then tracking income & spending over time, first manually, then a spreadsheet or Quicken. DS has done his own laundry from age 13 on. He decided to do the Boy Scout Entrepreneurship merit badge, requiring that a scout start & run a business for 6 months; he decided to raise & sell tomatoes. He bought all his supplies, did all the planting & weeding, harvested & sold most of his crop to a local high end restaurant for a $400 profit -- untold lessons here. When he entered high school, it was time for a checking account with debit card -- we then loaded it monthly with an amount designed to just cover his school & basic expenses. If it ran out, his problem. At 17, when he started driving solo, we helped him get a credit card, with the requirement that he had to pay it off in full every month.

It's a process, not just a dialogue. We haven't told him details of our net worth, just focused on wise saving & spending decisions. I used to be worried about our net worth killing his incentive, but I think he's now beyond that. We have always lovingly made it clear that while we may be rich, he is not. At 21, it's now up to him to decide what to do, but we hopefully have provided knowledge & we're always happy to coach.

[2527]

In response to a question by my son, I did tell him exactly how much we spent last year, and he found that very helpful.  I think it helped him put in perspective what it means when he hears, this job pays X, that job pays Y.

Recently, he heard that one of his fencing instructors is unemployed, and he said, "I thought he had a job teaching fencing."  And I had to explain to him that teaching fencing on Sunday afternoon at the YMCA is more like a hobby that pays a little money, but it is not the kind of job a middle-aged man needs to support his family.

[RyanAtTanagra]

it sounds like a very big number to a teenager, and I think it may complicate things and distort their thinking

There were a few things I was going to say but Malaysia41 hit all of them and then some, but I'd like to reiterate this one.  Don't minimize the above thought.  If my parents had tried to talk to me about their investments when I was young, they could have said they had $100k invested and my ears would have closed up to everything else as I considered how much that could buy and tried to figure out why we weren't spending it.  I think you need to start by getting them to understand that money can either be spent or invested, and why the latter is much more useful.  MMM has at least one article on this and in a fairly recent one he says something like 'money isn't some ephemeral thing where if you don't use it it's gone.  It will stay with you for the rest of your life if you let it'.

I would even go so far as to say don't even get into anything else until they fully understand this concept.  Hell, if this is the only thing they ever learned from you about money they'd be 90% of the way there.  Everything else is easy.  Once they understand this, then you can get into your guys' yearly cost of living, then safe withdrawal rates, then when you throw 2.5mil in there, they'll think 'ok so that really means $100k/yr (or whatever you tell them your SWR is)', and suddenly it's not such an incomprehensible number.

[mxt0133]

Yes - I'm interested to see the terms.  Perhaps it is a good investment - but I'm not holding out hope.  My take-away while studying for a CFP was that whole life is generally bad.

For most people this statement is correct.  Only if one has exhausted all tax-deferred savings accounts and cannot or will not manage their own investments then it might make sense to use them as an investment vehicle.  Treating life insurance as an investment vehicle is not optimal, the fees will always be higher because of the insurance component.  The insuring companies need to cover their liabilities and make a profit at the same time.

Whole/Universal Life insurance products can be ideal in cases where the wealthy use them as wealth transfer vehicles to avoid estate taxes and for companies to provide additional benefits to highly compensated employees.

But for the bottom 99% of people they are not optimal as a form of investment.

[GizmoTX]

it sounds like a very big number to a teenager, and I think it may complicate things and distort their thinking

There were a few things I was going to say but Malaysia41 hit all of them and then some, but I'd like to reiterate this one.  Don't minimize the above thought.  If my parents had tried to talk to me about their investments when I was young, they could have said they had $100k invested and my ears would have closed up to everything else as I considered how much that could buy and tried to figure out why we weren't spending it.  I think you need to start by getting them to understand that money can either be spent or invested, and why the latter is much more useful.  MMM has at least one article on this and in a fairly recent one he says something like 'money isn't some ephemeral thing where if you don't use it it's gone.  It will stay with you for the rest of your life if you let it'.

I would even go so far as to say don't even get into anything else until they fully understand this concept.  Hell, if this is the only thing they ever learned from you about money they'd be 90% of the way there.  Everything else is easy.  Once they understand this, then you can get into your guys' yearly cost of living, then safe withdrawal rates, then when you throw 2.5mil in there, they'll think 'ok so that really means $100k/yr (or whatever you tell them your SWR is)', and suddenly it's not such an incomprehensible number.

This is exactly why we've never disclosed our total net worth with DS. There has to be context.
We have talked a great deal about smart spending, including investments & compounding. He asks great questions, & we try to take advantage of teachable moments. This gives DS tools that most of his friends don't have.
However, since we are now retired, DS is concerned that we are in good financial shape. This wouldn't have occurred to him a few years ago.